Investors In The North American Free Trade Area Agreement - State Dispute Settlement Mechanism

As the slogan-chanting street demonstrations that consistently disrupt the meetings of the World Trade Organization (WTO) illustrate, there exists a contentious debate over the role of international trade organizations. The clash centers around the role of free trade regimes in the context of traditional ideas of state sovereignty in international trade relations. This debate has not only polarized the development of the WTO, but it has also controlled the development of regional trade arrangements. Specifically, the creation of the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico sparked much controversy among the domestic constituents of each country. The continued debate turns on whether NAFTA represents a pragmatic approach to maximizing trade benefits and opening markets to trade, or a step towards member countries relinquishing their sovereignty to a regional trade regime. In the more dramatic of the two interpretations, NAFTA represents a quasi-constitutional framework, both politically and legally binding, which restrains the ability of the United States, Canada and Mexico to implement public policy. When the NAFTA celebrated its ten-year anniversary in 2004, all of the trade statistics compiled at the time suggested that the NAFTA was an unparalleled success. For example, from "NAFTA: A Decade of Strengthening A Dynamic Relationship", By strengthening the rules and procedures governing trade and investment on this continent, the NAFTA has allowed trade and investment flows in North America to skyrocket. According to figures of the International Monetary Fund, total trade among the three NAFTA countries has more than doubled, passing from US$306 billion in 1993 to almost US$621 billion in 2002. That's US$1.2 million every minute. Despite the glowing reviews about the increase in trade and investment among NAFTA countries, the Agreement has come under rising criticism, in particular for the Chapter 11 investor-to-state dispute resolution regime.NAFTA Chapter 11 is divided in two sections: Section A contains the substantive rules such as National Treatment, Minimum Standards of Treatment, Performance Requirements, Transfers and Expropriation, and Compensation. Section B contains the dispute settlement rules for investor-State arbitrations. The disputing party is able to choose among three different arbitration rules: the Convention on the Settlement of Investment Disputes between States and Nationals of Other States ("ICSID Convention"), the International Centre for Settlement of Investment Disputes ("ICSID") Additional Facility Arbitration Rules, or the United Nations Commission on International Trade Law ("UNCITRAL") arbitration rules. NAFTA Chapter 11 is similar to the Bilateral Investment Treaties ("BITs") signed by the United States. The investor-State mechanism has been used by investors to claim damages for alleged breach of their investments. This mechanism allows the investor of one Party to bring a claim against another Party for alleged breaches of Section A of NAFTA Chapter 11.In fact, Chapter 11 proceedings have resulted in broader interpretations and far wider applications of the statutory framework than many of the NAFTA's drafters envisioned. However, given NAFTA's lofty objectives and purposes, it is not surprising that Chapter 11 has been interpreted broadly.The strongest critics of Chapter 11 claim that the NAFTA countries have risked their national sovereignty and their ability to freely engage in democratic law-making processes without the fear of having to compensate foreign investors for every regulation that negatively affects them. These critics claim that Chapter 11 has become a "sword" for investors, allowing them to attack the NAFTA countries, rather than the "shield" it was intended to be. This Comment will show that the Chapter 11 dispute resolution regime is indeed a "shield" necessary to protect foreign investors, while at the same time containing the potential to become an offensive "sword" to be used against the NAFTA countries. This Comment will also recommend possible solutions and demonstratethat by making appropriate amendments to Chapter 11, foreign investors will still be afforded a viable forum in which to address grievances with their host nations, and the NAFTA countries will be able to better protect their vital interests.Part I reviews the historical background of Chapter 11 dispute resolution as well as the brief introduction of its substantive and procedural structures. Part II introduces the substantive rules which are the basis of the investor-to-state dispute settlement mechanism. Part III focuses on the procedural structures of this mechanism, which constitutes the most important part of this article. Part IV considers key case studies forming the foundation of many of the various issues and points of contention among NAFTA's critics and proponents. Part V specifically outlines some of the most contentious points regarding Chapter 11 dispute resolution and considers whether the most common criticisms of Chapter 11 are warranted. Furthermore, this part also employs many words to show the influence of the NAFTA to the international investment law. Part VI concludes that the Chapter 11 regime can be improved by providing more openness in the arbitral process, clearer statutory definitions, and improved procedural safeguards. Part VI also recommends several ways to improve upon the Chapter 11 dispute resolution regime and the effective measures for China to take when joining the CAFTA and APEC.